Research

2024

1. 

   Information Asymmetry and Monetary Non-Neutrality: A Sequential Search Approach (will present in SED 2025!)

   Xiaojie Liu

   2024

   Job Market Paper

   Abs PDF

   This paper develops a model of monetary non-neutrality driven by information asymmetry between consumers and firms about nominal marginal costs in a sequential search framework. With only consumer-side frictions, this approach is distinguished from the standard one that relies on firm-side pricing frictions. Consumers’ value of search is determined by their information about the price index, and firm’s elasticity of demand depends on the perceived relative price. The passthrough of aggregate shocks to prices is therefore incomplete. The key mechanism is that, following a monetary shock, consumers attribute some of the resulting price changes to firm-specific adverse shocks, inducing them to search for alternatives. To dissuade search, firms compress the markup and limit the passthrough of the shock. I further show that the output gap is proportional to the nowcast error of inflation in the Phillips curve. Despite its parsimonious nature, the calibrated dynamic general equilibrium model can generate substantial monetary non-neutrality. Consistent with the mechanism, higher inflation is associated empirically with more active consumer search.

2. 

   A Framework for Economic Growth with Capital-Embodied Technical Change

   Benjamin Jones, and Xiaojie Liu

   American Economic Review, 2024

   Abs PDF

   Technological advance is often embodied in capital inputs, like computers, airplanes, and robots. This paper builds a framework where capital inputs advance through (i) increased automation and (ii) increased productivity. The interplay of these two innovation dimensions can produce balanced growth, satisfying the Uzawa Growth Theorem even though technological progress is capital-embodied. The framework can further address structural transformation, general-purpose technologies, the limited macroeconomic impact of computing, and declining productivity growth and labor shares. Overall, this tractable framework can help resolve puzzling tensions between micro-level observations of innovation and balanced growth while providing new perspectives on numerous macroeconomic phenomena.

3. 

   Confusion, Phillips Curves and De-anchored Inflation

   Xiaojie Liu, and Dalton Zhang

   2024

   Working Paper

   Abs PDF

   We investigate inflation dynamics when firms are uncertain about the causes of aggregate fluctuations and use prices and output as learning tools. During periods of low inflation, firms observing increased output attribute this change partly to positive demand and partly to positive supply factors, resulting in a dampened pricing response. Consequently, demand shocks are near non-inflationary. On the contrary, supply shocks are strongly inflationary, given that supply shocks directly change firms’ marginal cost while expectations about aggregate inflation and output is dampened. As inflation escalates, firms raise prices in response to either perceived positive demand or negative supply shocks, triggering a self-fulfilling cycle of de-anchored inflation. Supported by survey evidence, our model can generate realistic monetary non-neutrality and explains occasional inflation de-anchoring. This model explains the business cycle puzzle of inflation disconnect and flattened Phillips curve, and also offers new insights into inflation dynamics and monetary policy implications.

4. 

   Pricing Frictions and Innovation

   Xiaojie Liu, and Sara Moreira

   2024

   Working Paper

   Abs PDF

   This paper studies the relationship between pricing and product innovation decisions. Using detailed product- and firm-level data, we find new evidence of price frictions in incumbent products over their life cycle and their association with product innovation rates and the price levels of new products. Our findings suggest that the nominal price of an existing product barely increases over the long term. Instead, the rise in the nominal price index is largely driven by the introduction of new products. Firms tend to charge a high price premium on new products, a phenomenon we term ”price overshooting”. We develop a dynamic endogenous growth model within a monetary economy and demonstrate that, in an environment with pricing frictions, the option value of setting a new price incentivizes firms to innovate. Anticipating price rigidity over a product’s life cycle, firms overshoot prices at the initial stage of product introduction.

5. 

   Strategic Complementarity in Price Setting: Evidence from Retail Industry

   Xiaojie Liu

   2024

   Working in Progress

   Abs

   Strategic complementarities in firm price setting are crucial in shaping macroeconomic outcomes. This paper offers the first empirical estimate of retailers’ price responses to competitor price changes, leveraging large-scale Nielsen data on prices and sales. To address reverse endogeneity, we introduce a novel instrumental variable strategy based on DellaVigna and Gentzkow (2020). In contrast to Amiti, Itskhoki, and Konings (2019), who show strong complementarity in the manufacturing sector, we find weaker evidence of strategic complementarity, with a typical firm adjusting its price with an elasticity of 0.14 in response to competitors’ price changes. To explain this discrepancy, we develop a theoretical framework that incorporates two buyer-side frictions: (i) search frictions and (ii) information frictions regarding sectoral shocks. Our findings indicate that strategic complementarity is highly sensitive to the level of information frictions. Finally, we provide suggestive evidence that buyers in the retail sector, typically households, may have less information on sectoral shocks.

6. 

   Capital-Embodied Skill-Biased Technical Change

   Benjamin Jones, and Xiaojie Liu

   2024

   Working in Progress

   Abs

2023

1. 

   Time-Dependent Price Adjustment and the Neutrality of Money

   Xiaojie liu

   2023

   Working in Progress

   Abs PDF

   Caplin and Spulber (1987) famously argue that price stickiness disappears in the aggregate if the “right” firms change the prices in the menu cost economies. We present a mechansim that makes monetary non-neutrality disappears in time-dependent price adjustment models, which serves a counterpart to Caplin and Spulber (1987). In particular, we incorporates price dispersion into an otherwise standard New Keynesian model and demonstrate that monetary non-neutrality can be negligible even when only small fraction of firms adjust prices. The key mechanism is that adjustable firms create price-setting externalities for other firms: they alter demand across the price distribution such that prices remain optimal even for non-adjusting firms within the range suggested by a mixed pricing strategy. Following a positive (negative) monetary shock, only a negligible fraction of firms on the left (right) tail of the price distribution deviate from optimal pricing, resulting in negligible monetary non-neutrality.

2020

1. 

   Translation of "The Great Convergence: Information Technology and the New Globalization" to Chinese

   Author: Richard Baldwin; Translator: Xiaojie Liu

   2020

   Other Activities

   HTML